In the Court of Chancery of the State of Delaware
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE MIRAMAR POLICE OFFICERS’ RETIREMENT ) PLAN, ) ) Plaintiff, ) ) v. ) C.A. No. 9860-CB ) K. RUPERT MURDOCH, PETER L. BARNES, ) JOSÉ MARÍA AZNAR, NATALIE BANCROFT, ) ELAINE L. CHAO, JOHN ELKANN, JOEL I. ) KLEIN, JAMES R. MURDOCH, LACHLAN K. ) MURDOCH, ANA PAULA PESSOA, MASROOR ) SIDDIQUI, ROBERT J. THOMSON, and NEWS ) CORPORATION, ) ) Defendants. ) MEMORANDUM OPINION Date Submitted: February 10, 2015 Date Decided: April 7, 2015 Stuart M. Grant and Cynthia A. Calder of GRANT & EISENHOFER P.A., Wilmington, Delaware; Robert D. Klausner and Adam P. Levinson of KLAUSNER, KAUFMAN, JENSEN & LEVINSON, Plantation, Florida; Attorneys for Plaintiff. Gregory V. Varallo, Kevin M. Gallagher and Christopher H. Lyons of RICHARDS, LAYTON & FINGER P.A., Wilmington, Delaware; Attorneys for Defendants. BOUCHARD, C. I. INTRODUCTION This action involves a dispute over whether a corporation created to effectuate a spin-off transaction is bound by provisions in a contract that the former parent corporation had entered into in connection with resolving a lawsuit with its stockholders. In 2006, the media conglomerate News Corporation (“Old News Corp”) entered into a Stipulation of Settlement (the “Settlement Agreement”) to settle stockholder litigation filed in this Court in 2005. Subject to certain exceptions, the Settlement Agreement prevents Old News Corp during a period of twenty years from maintaining a stockholder rights plan for longer than one year without obtaining stockholder approval. In 2013, Old News Corp transferred its newspaper and publishing business into a wholly-owned subsidiary (“New News Corp”) and then spun off New News Corp to its stockholders pursuant to the terms of a Separation and Distribution Agreement. After the spin-off, Old News Corp was renamed Twenty-First Century Fox, Inc., which is now a broadcast and media company. In June 2013, the board of New News Corp adopted a one-year rights plan. In June 2014, the board extended that plan for an additional year without obtaining stockholder approval. In this action, a stockholder of New News Corp alleges that New News Corp, which was formed years after the Settlement Agreement was signed and is not a party to that contract, is nonetheless bound by that agreement as a transferee or assign of Old News Corp and, thus, that the 2014 extension of New News Corp’s rights plan was impermissible under the Settlement Agreement. 1 In its complaint, plaintiff asserts four causes of action against New News Corp and its board of directors: declaratory judgment (Count I); breach of contract (Count II); breach of fiduciary duty (Count III); and reformation due to mutual mistake (Count IV). Defendants moved to dismiss the complaint in its entirety under Court of Chancery Rule 12(b)(6) for failure to state a claim and Count IV under Court of Chancery Rule 9(b) for failure to plead mistake with particularity. In this opinion, I conclude that it is not reasonably conceivable that New News Corp is bound by the rights plan restrictions of the Settlement Agreement because, under the only reasonable interpretation of the Settlement Agreement and the Separation and Distribution Agreement, Old News Corp’s rights and obligations under the Settlement Agreement were not transferred or assigned to, or otherwise assumed by, New News Corp. I thus dismiss Count I for failure to state a claim. Because Counts II-IV are each premised on New News Corp being bound by the Settlement Agreement, I also dismiss those claims on that basis. Nothing in this decision relieves Old News Corp, now operating as Twenty-First Century Fox, Inc., from performing under the Settlement Agreement. It continues to be bound by those obligations, including the rights plan restrictions set forth therein. 2 II. BACKGROUND1 A. The Parties Defendant News Corporation (“New News Corp” or the “Company”), a Delaware corporation based in New York, New York, is a publicly traded, newspaper and publishing company. The Company has two classes of common stock: Class A non- voting shares and Class B voting shares. Defendants K. Rupert Murdoch, Peter L. Barnes, José María Aznar, Natalie Bancroft, Elaine L. Chao, John Elkann, Joel I. Klein, James R. Murdoch, Lachlan K. Murdoch, Ana Paula Pessoa, Masroor Siddiqui, and Robert J. Thompson have been the twelve members of New News Corp’s board of directors (the “Board” or the “Individual Defendants”) at all relevant times. Other than three overlapping directors—Defendants K. Rupert Murdoch, James R. Murdoch, and Lachlan K. Murdoch—the board of New News Corp has different members than the board of Old News Corp.2 1 Unless noted otherwise, the facts recited in this opinion are based on the well-pled allegations of the Verified Amended Complaint (the “Complaint”), which are accepted as true. See Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). 2 See Board of Directors, 21st Century Fox, http://www.21cf.com/Management/ BoardofDirectors (last visited Apr. 6, 2015). I take judicial notice of this fact because the accuracy of this source is not subject to reasonable dispute. See Solomon v. Armstrong, 747 A.2d 1098, 1121 n.72 (Del. Ch. 1999), aff’d, 746 A.2d 277 (Del. 2000) (TABLE); D.R.E. 201(b). 3 Rupert Murdoch is the Chairman of the Board and Chief Executive Officer of New News Corp.3 Individually and through the Murdoch Family Trust, Rupert Murdoch beneficially owns 39.4% of New News Corp’s Class B voting stock. Plaintiff Miramar Police Officers’ Retirement Plan (“Plaintiff”) has been a New News Corp stockholder at all relevant times. B. The Predecessor of Old News Corp Announces a Plan to Reincorporate in Delaware On April 6, 2004, the predecessor of Old News Corp, an Australian corporation named The News Corporation Limited (“TNCL”), announced a reorganization plan to reincorporate in Delaware as Old News Corp. In the reorganization, holders of TNCL’s Ordinary shares would receive a proportional amount of Old News Corp’s Class A non- voting stock, and holders of TNCL’s Preferred Limited Voting Ordinary shares would receive a proportional amount of Old News Corp’s Class B voting stock. TNCL’s Ordinary shares and Preferred Limited Voting Ordinary shares would vote separately on the reincorporation, which required approval by a 75% supermajority of all shares voting and 50% of all stockholders voting. As TNCL would explain to its investors in a September 15, 2004, Information Memorandum, there are significant differences between Australian corporate law and Delaware corporate law relating to, among other things, the ability of the board of 3 Compl. ¶ 14. Contrary to this allegation, New News Corp’s website reflects that Robert Thomson, not Rupert Murdoch, is the Company’s CEO and assumed that role in January 2013. See Our Leadership, News Corp., http://www.newscorp.com/about/leadership (last visited Apr. 6, 2015). 4 directors to adopt a stockholder rights plan or “poison pill.” Under Australian law, a board may not adopt a rights plan without stockholder approval. By contrast, under Delaware law, a board may do so at any time without stockholder approval, subject to the directors’ fiduciary duties, any limitations in the corporation’s charter or bylaws, and any restrictions in a valid and enforceable agreement to which the corporation is a party.4 C. TNCL Stockholders Complain About the Effects of the Reincorporation on Their Franchise Rights In July 2004, at the behest of certain TNCL stockholders, the Australian Council of Super Investors, Inc. (“ACSI”), a non-profit organization providing corporate governance services to its Australian pension fund members, and Corporate Governance International (“CGI”), an Australian proxy advisory firm, drafted a “Governance Article” to be included in Old News Corp’s charter. The Governance Article was intended to incorporate aspects of Australian corporate law to govern certain matters involving Old News Corp’s internal affairs. In particular, the proposed Governance Article provided that “the Board shall not have the power to, and shall not, create or implement any 4 See, e.g., Moran v. Household Int’l, Inc., 500 A.2d 1346, 1351-53, 1357 (Del. 1985) (concluding that it is within the power and authority of directors to adopt a stockholder rights plan pursuant to 8 Del. C. §§ 141, 151 and 157 while noting that this grant of power and authority does not relieve directors “of their basic fundamental duties to the corporation and its stockholders”); In re Nat’l Intergroup, Inc. Rights Plan Litig., 1990 WL 92661 (Del. Ch. July 3, 1990), reprinted at 16 Del. J. Corp. L. 841, 849-50 (Del. Ch. 1990) (granting summary judgment to plaintiffs on a claim that the board of directors breached their contractual obligations under a resolution approved by stockholders requiring stockholder approval of the adoption of a new rights plan). 5 device, matter or thing the purpose, nature or effect of which is commonly described as a ‘poison pill.’ ”5 On August 20, 2004, ACSI and CGI sent the Governance Article to TNCL and requested that it be included in Old News Corp’s charter. On September 26, 2004, after some back and forth, TNCL informed ACSI that “it would not adopt the Governance Article, and would not negotiate any further.”6 D. TNCL/Old News Corp Adopts a Policy Requiring Stockholder Approval of a Rights Plan Lasting Longer Than One Year Soon thereafter, TNCL resumed negotiations with ACSI over the proposed Governance Article. During those negotiations, TNCL proposed that the board of Old News Corp adopt a policy that, immediately following the reincorporation, “no [rights plan] instituted by the [b]oard could remain in effect longer than one year unless approved by stockholders, nor could a [rights plan] be ‘rolled over’ for successive terms without stockholder approval.”7 ACSI approved this and related corporate governance proposals.